Frequently Asked Questions (FAQ) about home purchase financing. Click each question for the answer.
- When a mortgage lender or Realtor refers to “PITI” what does it mean?
PITI is a term used to describe the total monthly housing payment after taking into account Principal, Interest, Taxes, and Insurance. Depending on the loan structure, this payment may also include a monthly mortgage insurance premium (PMI).
- What does it mean to “waive escrows”?
Waiving escrows is an option available on some loan products that allows the homeowner to take responsibility for the payment of taxes and insurance. Lenders will typically include the taxes and insurance as part of the monthly payment so that they can pay your tax and insurance bill when they become due. If a buyer chooses to waive escrows, an escrow waiver fee may be applied to your closing costs due to a higher perceived risk by the lender. You can only waive escrows if your loan program allows for this, such as conventional loans that have a loan value of 80% or less on your first lien.
- What is Private Mortgage Insurance?
Private Mortgage Insurance is insurance required on certain loans that help cover the lender expenses in the event that a borrower default on the loan. It is required on all first mortgages greater than 80% loan to value.
- What types of PMI are available? Do I have to pay it monthly?
While PMI is required on loans with less than 20% down payment, the PMI is typically structured as a monthly payment. The monthly payment can be avoided by paying a single upfront premium or by requesting that it be paid by the lender (LPMI).
- Do I always have to have PMI on my loan?
PMI can be avoided by having a down payment of at least 20%. If a loan starts with PMI, it can be eliminated after two years by showing the lender that the loan to value is 80% or less through appreciation or principal reduction. PMI can also be avoided by obtaining a second lien with an 80-10-10 or an 80-15-5 loan program.
- What mortgage vehicles are available today? Is it only 15 or 30 year fixed mortgage with 20% or more down?
Contrary to media hype and mortgage horror stories, there are still many different product types available with flexible down payment options. The majority of mortgage vehicles today are still Conventional and government programs, such as FHA and VA. Within each of the product types, lenders continue to offer, 30 yr. and 15 yr. fixed, as well as 3, 5 and 7 year adjustable rate mortgages.
- What is the best home mortgage loan?
The best home financing option will always be unique to the individual and their goals. Conventional loans are traditionally designed for higher credit scores and for people that have more flexibility with their down payment options. On the other hand, FHA and VA products are available with lower down payments. The government backed programs (FHA and VA) provide more lenience when it comes to credit. Those programs also allow lower down payments. Homebuyers who qualify for FHA financing can purchase their home with as little as 3.5% down, while Veterans using their VA eligibility can still purchase a home with zero down. If you would like more information, read our Mortgage Insider’s Information to Get the Best Home Loan.
- What is the biggest misconception about financing a home?
The biggest misconception that new buyers have is that there isn’t money available to lend. Many new buyers also believe that they will only be able to purchase a home if they have a substantial down payment. While lending guidelines have tightened, there are still plenty of funds available to lend with flexible down payment options as low as 3% or even zero down in certain areas or for Veterans.
- Do new buyers find their mortgage loan first or their Realtor?
While it is typically in the best interest of the buyers to speak with a mortgage representative first, many buyers will begin searching for homes before they have been pre-qualified. The pre-qualfication portion is very important because it not only provides proof of that buyers ability to purchase a home when submitting an offer, but also helps the buyer get a better understanding of what they can truly afford when it comes to the monthly payment and closing costs. Far too often, a buyer will begin looking for homes in a certain price range without a firm grasp on what their corresponding monthly payments and out of pocket closing expense would be.
- What is Pre-qualification?
Pre-qualification for a home purchase is a process that a potential homebuyer qualifies for a home mortgage before making an offer on a house. The pre-qualification begins with an application and review of the buyer’s documentation to find out if they meet the criteria to receive a loan at a given purchase price
- My real estate agent recommended that I get a pre-approval letter. What is a pre-approval letter, and why should I get one?
The lender gives a commitment letter that states the lender agrees to provide a mortgage to a homebuyer based upon certain criteria being met. Commitment letters help you set realistic goals while you’re house-hunting, provide the same negotiating ability as a cash buyer and enable you to move quickly once the perfect home is found.
- If buyers have already started working with a Realtor should they still get pre-qualified?
If the buyer has already begun looking for homes, they should definitely get pre-qualified. Now would be the time to get their home financing in order so they can set realistic parameters to use when finding a home. The goal would be to have a payment amount and out of pocket expense in mind for the price ranges that they are searching for homes.
- What do buyers need to understand about closing costs and points?
Buyers need to understand that closing costs are made up of the lender’s fees, estimates of title company charges, survey, appraisal etc. Buyers should also understand that not all mortgages require that “points” be paid. “Points” typically refer to a fee that is spent to obtain a lower interest rate. The more points you pay, the lower rate the buyer is able to obtain. This is where a true mortgage planner can help prepare an analysis to find out which combination of fees and interest rate is the best fit for their unique long and short term financial goals.
- What is the most common reason for a potential buyer to be turned down?
The mortgage market has undergone a substantial overhaul when it comes to qualifying potential buyers. The biggest obstacles for buyers to overcome are steady employment over the past 2 years, credit challenges, and not having enough liquidity to come up with the required down payments and closing costs. Each one of these component can be overcome through proper planning and consultation.
- Do home buyers continue to look for homes out of their price range?
Buyers continue to look for the best value that they can find in their price range. The updated mortgage guidelines do a good job of keeping a buyer’s purchasing power within a range that they can afford. Our team goes a step further to integrate the new monthly payment and out of pocket expenses into each clients long and short term financial goals.
- What is DE, DE underwriting and what does it mean to me?
DE stands for Direct Endorsement. It is reference to the ability to underwrite, approve, fund and deliver FHA loans. Having a DE underwriter means that we have the ability to accept an application package and approve the FHA home loan. A company without a DE underwriter must correspond with a lender that does have one if it wants to do FHA loans. Having DE ability greatly shortens the length of time to process, underwrite and approve FHA financing, in many cases at the best FHA interest rate.